When creating your company’s statement of financial position, accounts payable is an important section to get right – but what is accounts payable and which expenses does it include?
In this blog, we explain everything you need to know about this key part of your balance sheet.
Accounts payable meaning
Accounts payable is the amount a company owes its suppliers and creditors. It’s also called a current liability account and is recorded under ‘current liabilities’ in the balance sheet.
When a business buys services or goods on credit from a supplier, payment doesn’t happen immediately but is due within 30 days, 60 days, or even longer.
The company sends a purchase order to the supplier. Next, the supplier provides the purchased goods with an invoice requesting payment within a particular date. If that payment isn’t made within the agreement, default or late payments occur due to improper invoice processing or issues in the supply chain.
A key metric is the Days Payable Outstanding (DPO), which calculates the number of days a business takes to make payments to its suppliers. The higher the DPO, the longer a company makes use of its cash.
How does it differ from accounts receivable?
Accounts receivable is the payment a company is due to receive from its clients. Accounts receivable is put on record as an asset in the balance sheet and represents the money owed to a company when the customers buy goods or services, offering payment by a particular date.
For instance, if a company orders goods worth £700, it’ll record £700 credit in accounts payable. It’ll also document a debit of £700 on the expense account. Upon paying the invoice, accounts payable will be debited £700 and record £700 credit in cash.
The department of accounts payable
Accounts payable can also refer to the department in a business that makes third-party payments. Many large companies have a department that focuses specifically on this area. Smaller organisations, on the other hand, may have a small team that manages both receivable and payable.
This department is responsible for managing and processing outgoing payments, as well as interacting with suppliers. The main duties include:
- Receiving invoices
- Onboarding new suppliers
- Updating the accounts payable ledger
- Reviewing payment details
- Reconciling payments
- Paying suppliers on the agreed date
The accounts payable process
The process includes receiving vendor invoices, maintaining the master vendor file, uploading invoices into a financial payable automation system, matching and verifying invoices, waiting for approval, and processing payments. It may also involve negotiating terms, responding to buyer inquiries, and negotiating terms.
Some examples of accounts payable expenses include:
- Raw materials
- Services (subcontracting/assembly)
- Transport and logistics
- Products and equipment
Get help from a professional accountant
If you’re a small business and don’t have enough time to handle all of your accounts, we recommend hiring a professional accountant such as Accountants East London.
We offer various accounting services including bookkeeping services, statutory accounts, and corporate tax returns – among others. All matters concerning bookkeeping will be in safe hands so you can focus on activities that grow your business.